Palladium’s Fundamentals May Spur Investor Interest

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January 13, 2014 3:23pm NYSE:PALL NYSE:PPLT

PalladiumAnthony Tu-Sekine and Bibb L. Strench: Palladium is the ugly duckling of precious metals.  It is neither a preferred choice as “store of value” or jewelry.  In fact, its most common use is as industrial metal.  However, over the last two years,

Palladium has outperformed its three, more prominent siblings:  gold, silver and platinum.

Palladium’s lack of popularity extends beyond the jewelry counters and government mints to the investment arena.  There is a paucity of palladium investment options available to U.S. ETF and ETP investors.  Only a handful of exchange-traded options exist, and even fewer are available to an investor who wants to invest in a product backed by physical bullion in the U.S.—at last count there were only two such options: the ETFS Physical Palladium Shares (NYSEARCA:PALL) and the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP) (only approximately half of the holdings by value of the Sprott ETP are in palladium; the remaining holdings are in platinum).

Palladium has “interesting” supply and demand fundamentals in that the metal has a significant source of demand (palladium is an ideal catalyst for automobile catalytic converters at about half the cost of platinum and has other industrial uses, and the demand for palladium will rise if global automotive sales continue to increase) but supply remains below demand and a significant source of supply (Russian government stock accumulated during the Cold War) may be running out.

Another source of demand will be the soon-to-occur launch of a South African palladium fund by Absa Capital; while the fund’s organizers don’t expect the Absa palladium fund to be as successful as the New Plat platinum fund launched by Absa Capital in 2013, any palladium purchased by the fund will increase the existing supply deficit.

Investing In Palladium Bullion vs. Investing In Palladium ETFs/ETPs

Investing directly in physical bullion is not cheap, particularly if done on a small scale.  Most investors have to buy bullion at a premium, and sell at a discount, to spot.  On top of that, storage fees and, if the bullion is stored outside of the London Good Market or another approved custody system, fees to verify the fineness of the bullion upon sale eat into the asset value.  In addition, the smallest unit of non-coin bullion for trade is one bar, plate, or ingot, which again may be problematic for small investors. 

Bullion ETFs and ETPs, on the other hand, enable an investor to obtain exposure to bullion at much lower costs; such funds are able to purchase (and sell) bullion at a price much closer to spot, and the larger scale helps reduce storage fees as a percentage of assets.  The smallest unit of trade is a single share, which, with its lower price, provides a small investor with more flexibility than investing in bullion directly.

Of course, investors in ETFs or ETPs may incur brokerage fees, and the funds have management fees, but generally even after accounting for such fees, investing in a bullion ETF/ETP is significantly cheaper for the average investor than investing in bullion directly.  On the downside, an ETF or ETP may trade at a premium or discount to NAV, so the fund may not track the performance of bullion perfectly.

What About ’40 Act-Registered Palladium Funds?

Investors do not have the option of investing in ’40 Act registered palladium ETFs or mutual funds.  A ’40 Act fund (i.e., a fund registered under the Investment Company Act of 1940) must invest its assets predominantly in securities, not physical commodities such as palladium.  Thus, a “commodity mutual fund” that issues redeemable securities to non-institutional investors is not possible because mutual funds must hold a high percentage of liquid assets to be able to meet investor redemption requests within seven days of such request and must own a significant amount of securities to satisfy IRS regulations to avoid taxation at the entity level.

It is possible, but may not be practical, that a financial firm will sponsor a mutual fund or ETF that invests in securities whose performance is closely correlated to the value of palladium (such as securities issued by certain mining companies or smelters).

*About the Authors

Anthony Tu-Sekine and Bibb L. Strench both are counsel in the Washington, D.C. office of Seward & Kissel LLP and represent a number of ETFs and ETPs.

[1] Johnson Matthey Platinum 2013 Interim Review.

[2] Between the first trading day of 2012 and the last trading day of 2013, the spot price for gold, silver, platinum and palladium has changed -24.6%, -32.3%, -3.5% and 7.8%, respectively.  Source

[3] Only about a dozen countries have issued palladium coins, first and foremost Russia (and the USSR); many of these coins are commemorative coins aimed at a small market.

[4] There are up to a dozen other funds worldwide that invest in palladium in some form, but these funds are not listed in the U.S.

[5] Nat Rudarakanchana, Secret Russian Palladium Stockpiles Dwindle & May Disappear In Near Future, Supporting Prices,

[6] The fund was launched in April 2013 and held in excess of 900,000 oz. of platinum in January 2014, less than a year later.  Data from

[7] Tatyana Shumsky and Devon Shine, TF Brightens Palladium’s Shine, WALL ST. J., December 12, 2013.

[8] Even more so if the bullion is in the form of coins.

[9] These fees are less of an issue if investing in coins.

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